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withdrawal from IRA to cover previous withdrawal


M Norton

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Client withdrew funds from IRA, intending to redeposit that amount within 60 days and avoid the tax.  She is not going to be able to meet the 60-day deadline.

Can she withdraw an additional amount, then turn around and deposit it back into the IRA to cover the first withdrawal within the first 60-day period,  starting a new 60-day clock on the second withdrawal?  She thinks she will have the funds to cover it before the end of the second 60-day period.

Thanks!

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I thought there was limit to doing this either once per calendar year (in which case you may be OK) or once per 12-month period (in which case you're not OK). I don't deal with IRAs much, but I think it may be the latter and the reasoning is to prevent exactly what your client is doing (whether intentional or not) - essentially maintaining an ongoing interest free loan from her IRA through a series of withdrawals and redeposits/rollovers.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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No, you can't do that.

Read this:

IRA one-rollover-per-year rule 

You generally cannot make more than one rollover from the same IRA within a 1-year period. You also cannot make a rollover during this 1-year period from the IRA to which the distribution was rolled over.

Beginning after January 1, 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own.

The one-per year limit does not apply to:

  • rollovers from traditional IRAs to Roth IRAs (conversions)
  • trustee-to-trustee transfers to another IRA
  • IRA-to-plan rollovers
  • plan-to-IRA rollovers
  • plan-to-plan rollovers

Once this rule takes effect, the tax consequences are:

  • you must include in gross income any previously untaxed amounts distributed from an IRA if you made an IRA-to-IRA rollover (other than a rollover from a traditional IRA to a Roth IRA) in the preceding 12 months, and
  • you may be subject to the 10% early withdrawal tax on the amount you include in gross income.

See IRA One-Rollover-Per-Year Rule for more on this limit.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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  • 3 months later...

To simplify the answer:

Don't use an IRA or Roth for the 60 day loan.  If you fail to complete the transaction or even the custodian fails to get it done, you lose your tax advantage.

In a modern era of HELOCs, signature lines and credit cards, there are lots of short term sources of funds.  Add to that borrowing from a parent or relative.  

There are certain financial distress exceptions for IRAs, but the simplest concept is don't borrow from your IRA or Roth.  Don't get cute with a 60 day loan.

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